DeFi is one of the top current blockchain technology-related trends. The DeFi space is highly extensive, including many directions and use cases, being associated not only with cryptocoins. Read on to figure out what are the pros and cons of decentralized cryptocurrency.
What is DeFi?
First thing first, it should be specified what is included in the notion of “DeFi”. DeFi is an innovative financial mechanism with a basis on secure distributed ledger technologies close to those used by cryptocoins. It offers financial instruments, not relying on intermediaries, such as broker companies, exchanges, or banking institutions by using self-executing contract s stored on blockchain. Primarily, DeFi is applied in the bellow-mentioned areas:
- Crypto exchanges;
- Automated Market Maker (AMM);
- Crypto loan business;
- Staking;
- Non-Fungible Tokens (NFT);
- No-Loss Games and Lotteries.
Regardless of all the buzz around cryptocoins, in some specific cases there may be a lack of regulation, it is not always clear what are the pros and cons of DeFi, and whether it is safe to use it.
Pros that DeFi offers
- Due to the specific nature of blοckchain, payment operations cannot be reversed or fraud;
- Crypto users remain anonymous until they cash out or exchange their crypto holdings;
- The majority of currencies have a set supply, which will contribute to cooling inflation as mining more currency is more difficult;
- Smart contracts can be executed without the engagement of third parties;
- The payment operation fees are smaller compared to payment cards or other financial tools;
- No document requirement for contributing in tokens, unlike shares;
- Boosted competition allows for more extensive consumer choice;
- Issuance of currencies can be executed for special privileges or merit within Dapps and other blοckchain functions;
- Open access to newly issued tokens.
Cons that DeFi has
Many of the challenges and risks facing DeFi projects refer to the technologies they are based upon; blοckchain itself. Major disadvantages of blοckchain include:
- Market volatility affecting a token’s ability to be applied as a medium of exchanging;
- Uncertainty related to high speculation and artificial pricing;
- Scalability issues;
- Smart contract vulnerability which is a major source of issues for many DeFi projects. If there is the slightest flaw in the code of a smart contract, it can result in a loss of funds.
- Low liquidity – can be deemed as one of the most crucial points for DeFi token-based projects and blοckchain protοcols. The overall value locked in DeFi is more than 12.5 billion USD by October 2020. This is a little amount in comparison with the traditional systems.
- Low interoperability: Generally, there are several types of blockchains such as Btc, Eth, and BSC, each with their DeFi ecosystems. Interoperability makes it possible for De Fi platforms, instruments, decentralized apps, and self-executing programs grounded on various blockchains to interact with each other.
Having considered both pros and cons of decentralized cryptocurrency, it becomes clear that DeFi has the potential to completely disrupt monetary policy across the globe.
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